The inflation data for the month of March published last Thursday, as expected, has not been indifferent to anyone. Up to three different analyzes can be extracted from the same CPI data, all of them complementary, but which make it difficult for the layman to understand what is happening and, especially, what can happen from now on.

In any case, the script written months ago is being fulfilled, showing a significant year-on-year adjustment, a possible peak in the underlying and, here is the pleasant surprise, a somewhat better dynamic than expected in the monthly data. All this contained in a single number. It is therefore necessary to stop and evaluate each issue separately to then project, from this point, what we expect.

Let’s start with the year-on-year. This, highly conditioned to the base effect, has given the big “surprise”. The fall from the balcony of 6% to 3.3% in just one month reflects, to a large extent, a much more moderate evolution of prices as a whole since the end of the summer, as it was progressing. The big price increase of March 2022, present until Thursday in the figures for year-on-year growth, has disappeared; has been purged from the calculation, leaving more weight in the calculation to the much smaller increases since August. All that remains is to hope that the months of April and June will help a little more. Therefore, as I have always explained, this surprising adjustment only reflects something we knew: it is a confirmation of the past in a figure that emerges from the mere construction and design of this type of rate.

Let’s go inter-monthly. This increases four tenths, which given what was expected and the prevailing consensus before the publication of the data is slightly lower than expected. This figure is lower than the average for the months of March of the years prior to the pandemic, which allows us to place ourselves, for the moment, on an optimistic path for inflation. Thus, it is true that prices increased in March, but said increase was not exceptional.

However, this moderate increase is the result of very different contributions from prices which, in no way, should lead us to the conclusion that we have entered a sea of ​​calm. There is no doubt that fuel and energy, once again, will have helped by contributing negative tenths. But other prices will have contributed growth, so that 0.4 is only an average in a more than likely sample of prices with high variability. Only when the final data is published in two weeks will we be aware of what has happened in the guts of the calculation in order to have a more complete analysis. However, it is obvious that an increase of four tenths is better than another of nine.

Finally we have the underlying. You already know that I am somewhat belligerent regarding the figure by which the INE measures this special group of CPIs. It must be remembered that this definition includes prices of processed foods, which does not make much sense when we talk about underlying prices. Drought, for example, influences this data, which is obviously not logical when we want to measure the trend of price fundamentals.

The problem is that, until the middle of this month of April, we will not know exactly what it continues to contribute to that figure. In any case, the data, once again, has not been as bad as we might have expected and it seems that the underlying price would have reached a maximum in the month of February. Now I will qualify this hope.

So, and although this last figure remains exceptionally uncomfortable and worrisome, we ended the first quarter better than we started it in terms of inflation. The concern arising from the data for January and February takes a breather with those for March. The path that the year-on-year has decided to follow is the one that a few weeks ago was defined as optimistic. So, we go with these data somewhat more relaxed to the Easter holidays.

But to all this analysis we must add many other things to say and tell. As you can see in the graph that reproduces the one published in this same column on March 6, the same base effect that has helped to cut inflation down to 3.3 will easily make it possible for it to rebound when we get to the summer heat. But said rebound, which is a mere mathematical matter, like the big adjustment on Thursday, is not neutral in terms of policy and reaction of agents, so it will be all the more dangerous the greater the effects on some fundamentals that could help to that inflation takes much longer to stop being a costly episode.

We know from the data from the Tax Agency that both margins and salaries begin to rise at maximum rates in these first months of 2023. The possibility that before we expunge the base effect we will witness an appearance of second-round effects it is not trivial The labor market shows tensions, despite 13% unemployment and some sectors such as agriculture and livestock (with sharp increases in prices at source and margins on farms) or the hotel and catering industry threaten to continue heating up the environment. By no means have we won the war against inflation with the March data, we have only won a battle.

So, everything remains to be seen. If finally the price review dynamics, both for products and services and the labor market have “accustomed” to a context of rising prices, inflation will continue to be higher than what we would understand as the target of the European Central Bank . This March data, whose year-on-year adjustment is going to be repeated in a large part of Europe, may open a window of fresh air for those responsible for monetary policy, but without losing sight of the need to not fight a loss. For us, Pelennor Fields is the second half of this year.

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